The inventory turnover ratio (ITR) gauges the number of times stock has been turned over (replaced and sold) in a year. ITR is a sound indicator of stock management, accurate buying practices and consistent stock quality (whether the items are obsolete or not). It is assessed by dividing total purchases by average stock in a given period.
Measuring your stock turnover is important because gross profit is earned each time such turnover occurs. This ratio can enable you to see where you might improve your purchasing practices and stock management. For example, you could analyze your buying patterns as well as those of your clients to determine ways to reduce the amount of stock on hand. You may wish to turn some of your obsolete items into cash by selling it at a discount. The ITR also will indicate if your stock levels are too low and if you’re missing out on sales opportunities.
The formula is:
COST OF GOODS SOLD
ITR = ——————————–
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